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Harland-Clarke Holdings Corp: Downgraded By Moody's

A famous check printing company which survived the pandemic is in trouble again. The prognosis is not good.

Harland-Clarke - to oversimplify "is a provider of check and check related products". In fact, the company's "new" name has actually been Vericast since 2020, but we use the nomenclature the BDC lenders apply in their filings. In any case, the news is discouraging for the company whatever its name. On October 7, 2022 Moody's downgraded Harland/Vericast to Caa3. Obligations rated Caa3 are "judged to be of poor standing and are subject to very high credit risk".

The Moody's reasons for downgrading are numerous, but this paragraph says what we need to know:

The downgrades reflect deterioration in Vericast's operating performance and Moody's view that macroeconomic headwinds and the investments needed to transform the business will lead to sustained negative free cash flow, diminished earnings and weak liquidity over the next 12-18 months. A secular decline in the company's checks and print advertising business and rising costs  will make it difficult for Vericast to improve cash flow to a level that is supportive of its current capital structure, which Moody's views as untenable. High leverage and negative free cash flow create elevated risk of a balance sheet restructuring including a distressed exchange.

We have a CCR 4 rating already for the company, and this latest development does nothing to improve matters. We were influenced principally by the lower valuation of Cion Investment's (CION) $9.3mn first lien 2026 Term Loan that have been showing up for the last four quarters. As of June 30, 2022, the discount was (22%). So far CION has booked ($2.0mn) in unrealized losses. More is likely in the IIIQ and beyond. A default/restructuring/bankruptcy must also be in the cards.

That would cost CION annual interest income of about ($1.0mn), depending where LIBOR ends up. Our very rough maximum loss estimate is 50% - similar to what Moody's believes - given that financial performance is off, EBITDA down; liquidity weak and interest rates rising - a perfect storm. That could mean  CION has another ($2.7mn) in unrealized losses to book.

Of course, we'll be keeping careful track of the company, and would not be surprised if we didn't hear something sooner rather than later because management has some tricky refinancing to tackle in an increasingly hostile environment.

This is unfortunate for CION, which has been lending to the business since 2017 and successfully navigated the pandemic when the debt was discounted by nearly a third, according to Advantage Data's records. This time, a return to normal seems less likely, especially as some business lines are in "secular decline" - words never used in a joyful way.